On April 20, 2017, the President of the United States issued a memorandum requesting that the Commerce Department initiate a section 232 investigation on steel imports. A week later, another memorandum was issued to investigate aluminum imports.
A 232 investigation refers to section 232 of the 1962 Trade Act. It allows the executive branch to place a column 1 rate of duty on imports, or apply other trade remedies on imported products to protect national security interests. The stated goal is to guarantee that U.S. domestic production remains sound enough to meet the needs of the military.
A Brief History of Section 232 Investigations
Section 232 was passed in 1962 during the cold war. When the law was passed, there was a fear that United States industries might become too reliant on foreign producers. Since the law was passed, there have only been 26 section 232 investigations.
It was determined that there was no threat to national security in 15 of the 26 section 232 investigations. In four other investigations, the President determined that there was no action required to protect national security. In total, 73% of the section 232 investigations have ended with no action.
Of the remaining cases, there were four cases that had to do with oil. Two of the oil cases were country specific, and led to total embargoes against Libya and Iran. The other two petroleum investigations achieved very little to affect trade; One did away with petroleum quotas, and imposed a fee system that was later overturned by a court order. The result was the removal of restrictions on importing oil for national security.
The final two section 232 investigations also had minimal effects on trade. One case led to a voluntary restraint agreement (VRA). Japan and Taiwan both agreed to restrict exports of machine tools for five years. The other merely resulted in a plan for the Defense Department to stockpile certain ferroalloys for a ten year period.
What is the Current Situation?
In 2001 there was a similar 232 investigation on steel. The Commerce Department determined steel imports did not threaten the U.S. national security and no action was taken. The demand for steel for National Defense was 325,000 tons per year.
For the past ten years, the United States imported on average 25 billion dollars in steel products. In that same period, the U.S. exported on average 18 billion dollars. The only year the U.S. had a trade surplus of steel products was when the price dropped, after the 2008 housing market crash. Today the U.S. produces around 1,750,000 ton per week.
There is already some evidence of both increasing prices and increasing demand in emerging markets. If the largely expected infrastructure spending is passed, along with a strong buy America provision, it will likely shore up demand and increase prices for steel and aluminum. At present, and/or the foreseeable future, there is plenty of domestic production to meet the requirements of national defense.
However, there are facts that make it hard to argue that sanctions are necessary for national defense. China has actually been cutting production, while raising consumption of internal steel. Imports of steel from China have dropped over the past two years. The drop started after antidumping and countervailing duties were placed on steel products. These trade remedies seem perfectly apt to protect the United States Steel producers.
One largely uncharted territory with the section 232 investigations is whether or not, and to what degree, could any 232 sanctions be challenged legally. However, there are serious questions as to whether any 232 sanctions are actually needed for national security.
Typically when a law allows the executive branch the ability to investigate and issue a rule, the executive branch is afforded “Chevron” deference. That means the Court will uphold the administration’s rule so long as it is not defined as “arbitrary.”
However, the nature of a 232 sanction is based on national security. The standard of review of the President’s National Security decisions might be based on “facially legitimate and bona fide” justification of protecting national security. This means that the administration has to show a legitimate justification.
If the court upholds any section 232 sanctions or remedies, the last option would be for the affected nations to file with the World Trade Organization’s (WTO) Dispute Resolution Body. Any sanctions created under section 232 would not likely be in accordance with the United States WTO obligations. It will take a number of years before retaliatory sanctions are placed on the United States, to prompt them to drop the section 232 remedies.
Potential Impact on Importers
The Commerce Department has until January 2018, to issue its report. However, in public hearings, Commerce Secretary Ross said they had no intention of using all 270 days to finish the report and claimed they should be done before the end of June.
Section 232 of the trade act of 1962 has rarely been used, and for the most part, has had no effect on trade. It is possible, no matter how unlikely, that these investigations might result in serious challenges to trade. In a worst case scenario, the United States could block imports of both these metals under section 232. Importers are encouraged to stay knowledgeable of this investigation and the results, which are expected by year’s end.